While electric vehicles and plug-in hybrid electric vehicles (PHEVs) currently account for less than 1% of the cars produced annually, many believe that we are at the beginning of an “Electric Revolution.” In its recent comprehensive and authoritative report on the subject, Bernstein, a prominent Wall Street research firm, predicted that EVs could represent 40% of auto sales and 30% of the global car parc in 20 years. Likewise, UBS, a leading global financial services company, believes that a growing global electric vehicle fleet will be disruptive to gasoline demand by 2031.

There are many reasons for the growing belief that EVs represent the future of autos. First, technology costs have declined significantly, with battery costs approximately 20% of their cost five years ago. Also, further technological innovations, as well as substantial new battery capacity coming on stream in China, bode well for further price declines. Secondly, a charging infrastructure is now being put in place in China, the United States and other major countries around the world. Finally, EVs have lower operating costs than ICE vehicles, even at today’s oil prices. As technology costs drive the initial price of EVs lower, price parity with ICE powered vehicles and lower operating costs will make a compelling economic case for EVs.

In terms of the development of its EV industry, China has now pulled ahead of other countries, a leadership position which it is unlikely to relinquish. In 2016, 507,000 EVs and PHEVs were sold in China, a 53% increase from 2015. Meanwhile, 222,200 EVs and PHEVs were sold in Europe, a 14% increase; and 157,130 units were sold in the United States, a 36% increase from the prior year.

China ahead of the curve

Why is China leading the way in embracing EV technology? The answer may simply be that China has no other choice. As a country, China has three fundamental paths it may follow. First, it can choose to live with a rapidly growing number of ICE powered vehicles on its roads, with all that implies as far as air pollution and energy independence. Second, the government can restrict the transportation choices of its citizens in an effort to balance environmental concerns. Or third, the country can embrace EV technologies that enable its citizens to have their cars without jeopardizing air quality in its cities.

When ICE powered vehicles came of age, the United States, with its large land mass and suburban sprawl into low-density, car-dependent communities, was the largest auto market in the world. Today, China is the world’s largest auto market and represents most of the new worldwide demand for autos. The circumstances in the United States and China as far as the composition of their respective markets and cities could not be more different.

The reality in China is that the combination of its 1.3 billion population with rising per capita incomes is creating a demand for personal transportation that cannot be met in an environmentally sustainable way using traditional technologies. China is already the largest auto market in the world, and the 28 million vehicles produced in 2016 is expected to grow to 40 million by 2025. In the United States, there is nearly one car on the road for every man, woman, and child. In China, there is less than one car for every six individuals. While the number of cars per person in China may never reach U.S. levels, auto penetration will surely grow from where it is today.